Bankruptcies soared 32% in 2009

A 'perfect storm' sends filings up to highest level since '05 reform

Everyone from retirees who can't afford to live on Social
Security, to baby boomers who were downsized, to college graduates who can't find
work, to homeowners who drained the equity from their homes helped push 2009
personal bankruptcy filings up by nearly one-third over the previous year.

BANKRUPTCIES RISE 32% in '09

Nationally, bankruptcies rose from 1.1 million to more than 1.4 million, a 32% increase.

California led in the number of bankruptcies with 205,000.

Nevada led in the number of bankruptcies per capita: more than 11 per 1,000 residents

Arizona bankruptcies soared 77% from 2008 to 2009, leading the highest percentage increase in the nation.

"This is
now a perfect storm" as 2009 saw house prices fall and unemployment and
foreclosure rates rise, says David P. Leibowitz, a bankruptcy attorney and
managing member of LakeLaw, headquartered in Waukegan, Ill.

More than 1.4 million consumer filings were
recorded last year, according to AACER (Automated Access to Court Electronic
Records) and the American Bankruptcy Institute. Both groups issued 2009
year-end reports this week based on data compiled from U.S. bankruptcy courts.
That number compares to fewer than 1.1 million filings in 2008, making for a 32
percent increase. And 2008 was no easy year, with bankruptcies rising by
one-third from 2007.

Western states see
greatest increase
Which states suffered most from bankruptcy? It depends on the way the statistics are dissected.

The highest per capita bankruptcy rate was in Nevada, with more than 11 filings for every 1,000
residents. That put it far ahead of Tennessee (eight), and Alabama, Georgia and
Indiana (each with more than seven).

In terms of sheer volume, California recorded more than
205,000 filings, compared to 95,000 in Florida and more than 70,000 each in
Georgia and Illinois.

But Arizona led the pack when it came to the
greatest increase in filings from 2008 to 2009 -- soaring by 77 percent. It was
followed by Nevada, Wyoming, California and Utah -- each up by almost 60
percent.

All types of consumers
feel the pinch
Bankruptcy experts say the filings cut across all
demographic groups. Jo Anne Shumard, an Orlando-based bankruptcy attorney with
more than two decades of experience, says that in the past when clients met
with creditors "you could tell the clients from the lawyers." Today, the
clients could very well be doctors or lawyers. "It permeates every layer of
society."

In Florida, many who file for bankruptcy invested
in real estate and then ran into trouble when the housing bubble burst.

At the other extreme, Leibowitz has a 75-year-old
client who recently filed for bankruptcy because she doesn't receive enough
money from her Social Security benefits to cover living costs, and in the past
had used her credit cards to pay her medical bills.

If you had an economic problem, you
could mortgage your way out of it.

-- David Leibowitz
Bankruptcy attorney

But with many credit card companies cutting back on consumers' spending
limits or canceling cards completely, some consumers are becoming
financially strapped, Leibowitz says.

No easy way out
Earlier in the decade, consumers had easy access
to credit cards, and they were able to pay off that debt simply by refinancing
their homes, he says. In 2006 and 2007, "if you had an economic problem, you
could mortgage your way out of it."

But all that changed with the credit crunch and
the bursting of the housing bubble. On top of that, unemployment rates soared, hitting
10 percent nationally in November and reaching even higher in a number of
states.

At the same time, the historic reasons for filing
for bankruptcy -- divorce, illness, death of a spouse -- still come into play.

When bankruptcy hit its
peak
The number of bankruptcy filings peaked in 2005, just
ahead of the introduction of the Bankruptcy Abuse Prevention and Consumer
Protection Act of 2005. The law requires higher filing fees, a means test for
eligibility, counseling programs and an eight-year moratorium before a person
can file again.

As a result, consumers rushed to file before the
new law took effect, pushing filings up to about 2 million in 2005.

The influx of new filings, as well as the time it
took for attorneys to adjust to the new act, pushed filings down to just
617,000 in 2006. By 2007, filings had topped 850,000, and they have soared ever
since.

At the same time, there's been a steady shift in
the type of bankruptcy filings. In 2009, 72 percent of consumers filed under Chapter 7, which allows
some people to walk away without paying any debts. That's up from 67 percent
the previous year. Meanwhile, 28 percent filed under Chapter 13 in 2009, which requires at least
a partial repayment, versus 33 percent the preceding year. In comparison, 39
percent filed under Chapter 13 in 2007.

BANKRUPTCIES RISE ABOVE 5,000 PER DAY

In the fourth quarter of 2009, an average of 5,304 bankruptcies were filed per business day.

Most not prepared for
tipping point
Todd Christensen is director of education for Debt
Reduction Services, and provides debtor education courses to individuals before
a bankruptcy court discharges their obligations. Based in Boise, Idaho, the
company has offices around the nation. Christensen said via e-mail that 61
percent of those who filed for bankruptcy had no funds in emergency savings
when the event occurred that pushed them into bankruptcy, while 29 percent had
less than $1,000.

More than a third of those filing for bankruptcy
cited job loss or job reduction; one-quarter cited poor money management
skills; and about 20 percent were impacted by medical expenses, Christensen
says.

Catherine Williams, vice president of financial
literacy for Houston-based Money Management International, which does credit
and bankruptcy counseling, says those filing bankruptcy in 2009 tended to be
married, have slightly higher incomes than previously, and their average age was
in the mid-40s.

For the clients her firm deals with, 60 percent
have run into financial issues because they are unemployed. "Bankruptcy is a
trailing indicator of people's economic situation," Williams says, and people
can often go six months to a year before exhausting all their resources.

Stigma less, but trauma
remains
Leibowitz says he thinks consumers are more likely
to consider filing for bankruptcy today because "if bankruptcy is OK for the
airlines, for Kmart or for Donald Trump, why isn't it OK for me?"

But Shumard sees much anguish from many people who
contact her firm. "There's shame and grief, like with any major loss." Yet
despite the upsurge in bankruptcy filings, "who knows how many people are
sitting home, paralyzed."

And those people, along with the slow upturn in
hiring and the prediction that more foreclosed properties will hit the market
in 2010, leave the experts wary that bankruptcy filings will decline any time
soon.

Shumard says that historically, her phone stops
ringing after Thanksgiving, and the calls don't pick up again until late
January. But not this year. She's been going nonstop all through the holiday
season and into the start of the new year. She predicts, "we're in for a very
tumultuous ride."

Published: January 7, 2010

Join the discussion

We encourage an active and insightful conversation among our users. Please help us keep our community civil and respectful. For your safety, do not disclose confidential or personal information such as bank account numbers or social security numbers. Anything you post may be disclosed, published, transmitted or reused.

If you are commenting using a Facebook account, your profile information may be displayed with your comment depending on your privacy settings. By leaving the 'Post to Facebook' box selected, your comment will be published to your Facebook profile in addition to the space below.

The editorial content on CreditCards.com is not sponsored by any bank or credit card issuer. The journalists in the editorial department are separate from the company's business operations. The comments posted below are not provided, reviewed or approved by any company mentioned in our editorial content. Additionally, any companies mentioned in the content do not assume responsibility to ensure that all posts and/or questions are answered.

Did you like this story? Then sign up for CreditCards.com’s weekly e-newsletter for the latest news, advice, articles and tips. It's FREE. Once a week you will receive the top credit card industry news in your inbox. Sign up now!